Credit

Standard & Poor’s Warns Chicago ‘Downgrade Of More Than One Notch Is Possible’

Not too much talk about the following last week in the Chicago-area news. From Standard & Poor’s credit analyst Helen Samuelson over on S&P’s Global Credit Portal website on April 9:

CHICAGO (Standard & Poor’s) April 9, 2015–After months of campaigning and uncertainty, Chicago (A+/Negative general obligation debt rating) can get back to the business of running itself. As such, we expect Mayor Rahm Emanuel’s attention to be focused on the city’s budget challenges, namely its ballooning pension obligation.

During the course of the election — and particularly during the runoff — Mayor Emanuel avoided addressing the possibility of property tax increases to help pay for these pension obligations.

“Following Tuesday’s vote, in order to maintain its current rating, we expect the administration to address the pension and budget challenges head on by providing solutions that will support the city’s credit strengths in the near and far term,” said Standard & Poor’s credit analyst Helen Samuelson.

Our ‘A+’ rating is predicated on Chicago’s ability to make the changes necessary to address its budget gap and pension problem. However, even with this ability, to ensure long-term stability Chicago still needs to demonstrate its willingness to make difficult choices that address its budget issues.

Otherwise, the ‘A+’ rating could be severely pressured. Our negative rating outlook reflects the city’s fiscal pressures. If the city doesn’t find structural solutions, a downgrade of more than one notch is possible.

In our view, if the city fails to articulate and implement a plan by the end of 2015 to sustainably fund its pension contributions, or if it substantially draws down its reserves to fund the contributions, we will likely lower the rating. This is regardless of whatever relief the state legislature may or may not provide. We will likely affirm the rating and revise the outlook to stable if Chicago is able to successfully absorb its higher pension costs while maintaining balanced budgetary performance and reserves at or near their current level…

(Editor’s note: Bold added for emphasis)

To date, a different credit rating agency- Moody’s- has been making the most noise about the City of Chicago’s financial woes. Yvette Shields reported on The Bond Buyer website on April 6:

The city has suffered a steep credit rating slide and further credit deterioration is threatened.

Chicago’s GO ratings range from a low of Baa2 — two notches above speculative grade — from Moody’s to a high of A-plus from Standard & Poor’s…

“A-plus.” That may not be the case at year end.

You can read that entire Standard & Poor’s piece on the Global Credit Portal here.

Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Shields, Yvette. “Big Stakes as Market Awaits Chicago’s Mayoral Pick.” The Bond Buyer. 6 Apr. 2015. (http://www.bondbuyer.com/news/regionalnews/big-stakes-as-market-awaits-chicagos-mayoral-pick-1071986-1.html). 16 Apr. 2015.

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Thursday, April 16th, 2015 Credit, Debt Crisis, Entitlements, Government, Taxes No Comments

Bill Introduced To Permit Illinois Municipalities To File For Bankruptcy

Since I started blogging about a U.S. financial crash back on Memorial Day Weekend 2007, I’ve believed one casualty will be municipal government. Particularly in Illinois. So imagine my non-surprise when I spotted an article on the Chicago Tribune website a couple of days ago about proposed legislation at the state level granting Illinois towns the authority to file for bankruptcy. Nick Swedberg of the Associated Press wrote on March 26:

Stressed by pension debt, other financial issues and the possibility losing a chunk of their state aid, some Illinois cities want the option to file for bankruptcy. They’ve found an ally in a Republican lawmaker, who’s proposed legislation to allow municipalities to follow in the footsteps of Detroit and other cities in restructuring debt and paying back creditors…

Rep. Ron Sandack is sponsoring legislation that would grant authority for communities to file for bankruptcy under Chapter 9 of the federal code. The Downers Grove Republican says it’s a “measure of last resort,” especially with Gov. Bruce Rauner’s proposal in next year’s budget to cut in half the local governments’ share of state income taxes by 50 percent.

“It’s just giving time and space to do things right,” he said…

Swedberg added later in the piece:

Municipal bankruptcies are rare, NCSL data shows. Of 37 local government filings since 2010, only 8 were cities, with the majority filed by utilities and special districts.

Detroit filed for the nation’s largest municipal bankruptcy in July 2013, looking to restructure $12 billion of debt…

It’s true. Municipal bankruptcies haven’t happened too often. But keep in mind what Eric Weiner wrote on the NPR website back on February 28, 2008:

For most of U.S. history, cities and towns were not eligible for bankruptcy protection. But during the Great Depression, more than 2,000 municipalities defaulted on their debt, and they pleaded with President Roosevelt for a federal bailout. “All they got was sympathy,” reported Time magazine in 1933. Instead, Roosevelt pushed through changes to the bankruptcy laws that allows towns and cities to file for bankruptcy. They even got their own section of the bankruptcy code: Chapter Nine…

(Editor’s note: Bold added for emphasis)

There’s also this from Robert Slavin on The Bond Buyer website back on January 14:

For the municipal bond industry, 2015 marks the midpoint in what may turn out to be the decade of the bankruptcy.

Four of the five largest municipal bankruptcy filings in United States history have been made in roughly the last three years, a trend analysts attribute to the aftereffects of the 2008 credit crisis and Great Recession, as well as changing attitudes about debt.

“The crash of 2008 and five years of stagnation preceded by years of escalating wages, pensions and Other Post-Employment Benefits set the stage for our recent Chapter 9 filings,” said Arent Fox partner David Dubrow.

Chapter 9 municipal bankruptcy was adopted in 1937 but had been rarely used, particularly by large governments. However, since November 2011 San Bernardino, Calif., Stockton, Calif., Jefferson County, Ala., and Detroit have filed four of the five largest bankruptcies as measured by total obligations.

(Editor’s note: Bold added for emphasis)

Could the specter of Meredith Whitney, the “Diva Of Doom,” be returning to take revenge on the municipal bond industry?

I’m not surprised Illinois municipalities would be interested in House Bill 298. From Patrick Rehkamp and Andrew Schroedter on the website of the Chicago-based Better Government Association back on December 6, 2014:

Reasons for filing vary but often include troubled public development projects, unanticipated hefty legal judgments against a taxpayer-backed entity, or massive pension and bond debt payments that leave a municipality cash-strapped and unable to cover operating costs of employee salaries, vendor payments and other expenses.

(Editor’s note: Bold added for emphasis)

The public pension crisis in Chicago and Illinois has been well-publicized for some time now. And while such entitlements are supposedly protected by a provision in the 1970 Illinois Constitution, the BGA noted in their piece:

In Illinois, public employee pensions are guaranteed by the state constitution. But in the Detroit and Stockton, California bankruptcy cases, federal judges have ruled that pension benefits can be adjusted, the same as other debts, despite a constitutional guarantee.

(Editor’s note: Bold added for emphasis)

You can track the progress of HB 298 on the Illinois General Assembly website here.

Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Sources:

Swedberg, Nick. “Bill pushes for possible municipal bankruptcies in Illinois.” Associated Press. 29 Mar. 2015. (http://www.chicagotribune.com/news/sns-bc-il–closer-look-bankruptcy-20150329-story.html). 3 Apr. 2015.

Weiner, Eric. “What Happens When City Hall Goes Bankrupt?” NPR. 28 Feb. 2008. (http://www.npr.org/templates/story/story.php?storyId=60740288). 3 Apr. 2015.

Slavin, Robert. “Why So Many Big Bankruptcies?” The Bond Buyer. 14 Jan. 2015. (http://www.bondbuyer.com/news/markets-buy-side/why-so-many-big-bankruptcies-1069539-1.html). 3 Apr. 2015.

Rehkamp, Patrick and Schroedter, Andrew. “Next Up: Illinois Municipal Bankruptcy?” Better Government Association. 16 Dec. 2014. (http://www.bettergov.org/next_up_illinois_municipal_bankruptcy/). 4 Apr. 2015.

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Moody’s Downgrades Chicago’s Credit Rating Yet Again, Issues Negative Outlook

Chicago’s financial health is still pretty bleak in 2015.

Almost one year ago to this day, I blogged about bond credit rating giant Moody’s Investor Service downgrading the City of Chicago’s general obligation (GO) and sales tax ratings to Baa1 from A3, affecting $8.3 billion of GO and sales tax debt. I added last March:

According to Moody’s, “Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.”

Just before the weekend, Moody’s downgraded Chicago’s credit rating yet again. The Global Credit Research division announced on the Moody’s website under “Ratings News” Friday:

Rating Action: Moody’s downgrades Chicago, IL to Baa2; maintains negative outlook

Baa2 applies to $8.3B of GO debt, $542M of sales tax debt, and $268M of motor fuel tax debt

New York, February 27, 2015 — Moody’s Investors Service has downgraded to Baa2 from Baa1 the rating on the City of Chicago, IL’s $8.3 billion of outstanding general obligation (GO) debt, $542 million of outstanding sales tax revenue debt, and $268 million of outstanding or authorized motor fuel tax revenue debt. We have also downgraded to Speculative Grade (SG) from VMIG 3 the short-term rating on the city’s outstanding Sales Tax Revenue Refunding Bonds, Variable Rate Series 2002. The outlook on the long-term ratings remains negative…

“The outlook on the long-term ratings remains negative”

Kind of hard to get excited about the “Windy City’s” prospects after reading that.

To be fair, some are suggesting the credit rating downgrades are being influenced by City Hall in order to avoid meeting certain financial obligations (i.e., Chicago’s well-publicized public pension crisis).

“We ain’t got it.”

You can read the entire Moody’s press release on their website here.

Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Chicago Reader: Did Rahm Emanuel Deliver On Public Safety Campaign Promises?

The Chicago Reader has done a terrific job lately of keeping a tab on public safety in Chicago. And yesterday, the Reader website ran an article entitled “Did Rahm live up to his campaign promises on public safety?” Mick Dumke wrote:

During his first campaign for mayor four years ago, Rahm Emanuel kept talking about police.

He noted as often as he could that his uncle had been a cop on Chicago’s north side. He boasted of his role in crafting the Clinton administration’s 1994 crime bill that funded the hiring of 100,000 police officers nationwide.
And, as the centerpiece of his public safety plan, he vowed to find the money to add 1,000 more officers to Chicago’s force. He said this would prevent crime and improve relationships with the community.

“Police officers will become a presence in the neighborhood rather than only available in response to emergency,” he said.

But within weeks of taking office, Emanuel stopped talking about hiring cops. Instead, over the course of his first term, the number of officers on the force dropped from about 10,900 to 10,600. And the mayor responded to violent crime not by investing in community policing but by calling for stricter gun laws and blaming legislators who balked.

The result after four years: crime totals have fallen, as they have across the country. But Chicago still has more violent crime per capita than New York or Los Angeles, with an average of seven people shot every day…

(Editor’s note: Bold added for emphasis)

A real insightful piece, which can be read in its entirety on the Chicago Reader website here.

Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Wednesday, January 21st, 2015 Credit, Government, Gun Rights, Public Safety No Comments

Marc Faber, Jeremy Grantham, Jim Rogers, And Peter Schiff All Sound The Alarm

I find it both funny and disturbing that the financial types who missed the U.S. housing bubble/bust and global economic crisis that was readily-visible by the second half of 2008 are now claiming the U.S. economic “recovery” is on solid footing and there are no asset bubbles in sight.

Meanwhile, the few individuals who correctly-predicted that carnage- including Marc Faber, Jeremy Grantham, Jim Rogers, and Peter Schiff- are sounding the alarm again.

Here’s what each of these “crash prophets” have been saying lately (the following statements have all been blogged about previously on Survival And Prosperity).

Swiss-born investor and money manager Marc Faber warned CNBC Squawk Box viewers on September 19, 2014:

Today, the good news is we have a bubble in everything, everywhere– with very few exceptions. And, eventually, there will be a problem when these asset markets begin to perform poorly. The question is- what will be the catalyst? It could be a rise in interest rates not engineered by the Fed, because I think they’ll keep interests rates at zero on the Fed funds rate for a very long time… We could have essentially a break in bond markets at some point. We also could have a strong dollar. A strong dollar has already happened in the last two months signifies that international liquidity is tightening. And when that happens, usually it’s not very good for asset markets.

“A bubble in everything, everywhere.” Reminds me of what British-born investment strategist Jeremy Grantham said right before the asset bubbles popped during the “Panic of ’08.” Speaking of Grantham, he penned in his November 2014 quarterly investment letter entitled “Bubble Watch Update”:

I am still a believer that the Fed will engineer a fully-fledged bubble (S&P 500 over 2250) before a very serious decline…

My personal fond hope and expectation is still for a market that runs deep into bubble territory (which starts, as mentioned earlier, at 2250 on the S&P 500 on our data) before crashing as it always does. Hopefully by then, but depending on what the rest of the world’s equities do, our holdings of global equities will be down to 20% or less. Usually the bubble excitement – which seems inevitably to be led by U.S. markets – starts about now, entering the sweet spot of the Presidential Cycle’s year three, but occasionally, as you have probably discovered the hard way already, history can be a snare and not a help.

(Editor’s note: Bold added for emphasis)

“Fully-fledged bubble (S&P 500 over 2250) before a very serious decline…”

The S&P 500 stands at 2,058 this Sunday- only 192 points away from Grantham’s bubble “target.”

There’s also investor, financial commentator, and author Jim Rogers, who was talking U.S. equities on RT’s Boom Bust on December 26, 2014, when he remarked:

I know the bear market will come… The next bear market, Erin, is going to be much worse than the last one because the debt has gone through the roof. Debt worldwide, including the U.S., has skyrocketed, and we’re all going to have to pay a terrible price for all this money printing and all this debt.

(Editor’s note: Bold added for emphasis)

Finally, there’s Euro Pacific Capital’s Peter Schiff, who argued on The Schiff Report YouTube video blog on Halloween 2014:

When this illusion collapses, this fantasy of a U.S. economic recovery- because everybody believes there’s no recession anywhere in sight, that we’re years away from a U.S. recession- when in fact, another recession is right around the corner. And in fact, it will be worse than the recession that we had in 2008, 2009, if the Fed does not come in with QE 4…

I expect Janet Yellen to react to this coming recession the way Ben Bernanke reacted to the last one. The way Alan Greenspan reacted to the last one. Because that’s the only playbook we’ve got. And remember, when this recession starts, they can’t start with rate cuts. Rates are at zero. You can’t cut from zero. All they can do is revamp QE. And believe me, it’s going to have to be a lot bigger than QE 3. QE 4 is going to have to be bigger than QE 3 for the same reason QE 3 had to be bigger than QE 2- the economy builds up a tolerance. The more addicted to QE, the more QE you need to get any kind of result. And this last result was minimal in the real economy. I mean, yes- the Fed was able to get the stock market to go up, but the real economy never experienced any real economic growth. The average American is worse off today than when QE began. By far. Incomes are down. Real employment is down. Net worth is down. Poverty is up. Government dependency is up. The cost of living is up. Nothing has improved, except maybe the level of optimism on Wall Street…

This crisis is not really going to be about a credit crisis. Not private credit. It’s going to be about debt. Sovereign credit. It’s going to be about the dollar. A currency crisis. A sovereign crisis. Which is going to be very different than the crisis we had in 2008. It’s a crisis of an excess of QE. Of an overdose of QE. That’s the one that’s coming. That’s the one that we have to prepare for. That’s the one that I have been warning about since the beginning…

Schiff, who’s also a financial commentator and author, has been the most vocal of the four in warning of economic pain dead-ahead of us.

Jim Rogers talking the day after Christmas about the coming bear market alerted me to the fact that all these “crash prophets” whom I regularly-follow on this blog are now sounding the alarm at the same time. To summarize their recent warnings:

Marc Faber- “A bubble in everything, everywhere.” Actually, I believe he still likes Asia and Asian emerging economies.
Jeremy Grantham- “I am still a believer that the Fed will engineer a fully-fledged bubble (S&P 500 over 2250) before a very serious decline.”
Jim Rogers- “The next bear market… is going to be much worse than the last one because the debt has gone through the roof.”
Peter Schiff- “An overdose of QE. That’s the one that’s coming. That’s the one that we have to prepare for. That’s the one that I have been warning about since the beginning.”

At the start of 2015, it will be interesting to see how the next couple of years play out, for I believe Americans will get the chance to experience quite a bit of the above in that time period- whether they want to or not.

Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s notes: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Marc Faber Shares 2015 Outlook, Talks Bonds, Stocks, Precious Metals

Yesterday, Swiss-born investment advisor/money manager Marc Faber appeared on Bloomberg Television’s In the Loop. Speaking with Brendan Greeley, Betty Liu, and Erik Schatzker, the publisher of the monthly investment newsletter The Gloom Boom & Doom Report shared his outlook for 2015. Dr. Faber told viewers:

I’m saying that we will have a lot of volatility and a lot of surprises, that’s why I keep on recommending diversification. And I just like to mention that hedge funds in 2014 and active money managers had a bad year. Almost 90 percent of active managers underperformed the S&P 500. And hedge funds, by-and-large, the average is up about 1 percent. But the portfolio that has actually done well is the All Weather portfolio of Bridgewater Associates, because they diversified- they were also in bonds…

So I’m diversified. I still think that the sentiment about stocks in the U.S. is much too bullish, much too optimistic… I think the Treasury market is not such a bad alternative given my view that the global economy is actually slowing down, and given the low yields you have in Japan and Europe.

(Editor’s note: Bold added for emphasis)

Famous for advising clients to get out of the U.S. stock market one week before the October 1987 crash and for calling the 2008 global economic crisis, Dr. Faber told the Bloomberg audience that when it comes to stocks, he prefers to invest in Asia and emerging economies of Asia than in the U.S.

The “crash prophet” added one more thing. Faber said:

I tell you, I prefer physical precious metals stored outside the U.S. But if you cannot own physical precious metals, I believe that whereas the sentiment about the stock market is bullish, and about investments in general, and whereas I believe that most assets are in kind of a bubble- we have a credit bubble- I have to say that sentiment about precious metals is incredibly negative. And all these experts are predicting gold price to drop to $700. Well understood, these are experts that never owned a single ounce of gold in their lives. So they missed the five-fold increase since 1999. But they all know that the price of gold will go to $800- they’re right about it with a lot of authority. And they also say these are people that never gave a gold jewelry to their girlfriends and saw the smile of these beautiful girls after they received the jewelry.

(Editor’s note: Bold added for emphasis)


“Marc Faber: Diversify Amid Volatility, Surprises in 2015”
Bloomberg TV Video

Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Nouriel Roubini: ‘Mother Of All Asset Bubbles’ To Pop In 2016

One of the original “crash prophets” of the 2008 global economic crisis is now sounding the alarm over what he sees in 2016.

I first mentioned Nouriel Roubini, a former Treasury official under the Clinton administration, a professor of economics at NYU, and chairman of Roubini Global Economics, in my old blog Boom2Bust.com several years ago. Roubini correctly-predicted the financial crisis, but “Dr. Doom”- as the financial media likes to call him- had become more optimistic this year. On May 14, 2014, he “debated” fellow “prophet” Peter Schiff on CNBC’s Fast Money, saying:

We’re printing a lot of money but it’s not creating credit. It’s not creating inflation. And if we had not done this policy, this Great Recession would have become a Great Depression. So, inflation is going to stay low. Gold prices are going to fall. And I don’t believe that the dollar’s going to collapse. Actually, I believe the dollar’s going to become stronger in the next few years- just the opposite of what Peter thinks.

But these days, Dr. Roubini is starting to sound gloomy again. Last week, I happened to come across a Yahoo! Finance interview with Roubini from earlier this month. From an exchange with editor-in-chief Aaron Task:

TASK: Nouriel Roubini is often referred to as “Dr. Doom”- affectionately of course- but the NYU professor and chairman of Roubini Global Economics is not always downbeat. He prefers “Dr. Realist,” and in February 2013 Roubini told Yahoo! Finance and this reporter that, “The mother of all asset bubbles had begun, and would eventually be bigger than the 2003-2006 bubble.” Since that time the S&P 500 is up about 40 percent, so Nouriel, that was a great call if you were long, and bubbles are great if you’re long and you get out in time. Where do you see- what inning, if we use the baseball analogy, are we in in this bubble from your point of view?
ROUBINI: We’re in middle-later innings. Next year we’ll have economic growth. We’re still easy money. I think that this frothiness that we’ve seen in these financial markets is likely to continue- from equities to credit to housing. And in a couple of years, most likely, this asset inflation is going to become asset frothiness. And eventually, an asset and a credit bubble. And eventually, any booming bubble ends up a bust and a crash. I don’t expect that happening next year, but I would say that valuations in many markets- whether its government bonds or credit or real estate or some equity markets- are already stretched. They’re going to become more stretched as the real economy justifies a slow exit, and all this liquidity is going into more asset inflation. And so, two years down the line for them to shake out, but not before then.
TASK: A couple of years down the line, okay.
ROUBINI: Yeah. 2016 I would say.

(Editor’s note: Bold added for emphasis)


“Roubini: U.S. equities will be strong until 2016”
Yahoo! Finance Video

Dr. Roubini gave this advice to investors:

At this point, I would be neutral or underweight U.S. equities compared to other markets.

As for “best bets” in 2015, he told viewers:

Several I would say. I would say, dollar strength relative to the euro, relative to the yen, relative to the commodity currencies, relative to fragile emerging markets. And a bet on commodities further another leg down, certainly industrial metals like copper and others linked to China. Those will be two of the stories for 2015.

Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s note: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Stephen Roach Warns Fed Headed Down ‘Highly Dangerous Path’

“Dow industrials mark their fifth fastest 1,000-point rise in history”

-MarketWatch.com, December 23, 2014

Shortly after my old blog Boom2Bust.com, “The Most Hated Blog On Wall Street,” debuted on Memorial Day Weekend 2007, I shared a warning from the former chairman/chief economist of Morgan Stanley Asia, Stephen Roach. Brett Arends wrote in the Boston Herald’s “On State Street” column on November 23, 2004:

Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish.

But you should hear what he’s saying in private.

Roach met select groups of fund managers downtown last week, including a group at Fidelity.

His prediction: America has no better than a 10 percent chance of avoiding economic “armageddon.”’

Press were not allowed into the meetings. But the Herald has obtained a copy of Roach’s presentation. A stunned source who was at one meeting said, “it struck me how extreme he was – much more, it seemed to me, than in public.”

Roach sees a 30 percent chance of a slump soon and a 60 percent chance that “we’ll muddle through for a while and delay the eventual armageddon.”

The chance we’ll get through OK: one in 10. Maybe…

A decade later, it’s safe to say Roach got those calls about the slump and muddling through for a while correct (give it time on that “armageddon” bit still).

But now, Stephen Roach is sounding the alarm again.

He wrote on the Project Syndicate website earlier today:

America’s Federal Reserve is headed down a familiar – and highly dangerous – path. Steeped in denial of its past mistakes, the Fed is pursuing the same incremental approach that helped set the stage for the financial crisis of 2008-2009. The consequences could be similarly catastrophic

(Editor’s note: Bold added for emphasis)

Roach noted that the U.S. central bank remains steadfast in keeping the federal funds rate near zero, before warning:

This bears an eerie resemblance to the script of 2004-2006, when the Fed’s incremental approach led to the near-fatal mistake of condoning mounting excesses in financial markets and the real economy. After pushing the federal funds rate to a 45-year low of 1% following the collapse of the equity bubble of the early 2000s, the Fed delayed policy normalization for an inordinately long period. And when it finally began to raise the benchmark rate, it did so excruciatingly slowly.

In the 24 months from June 2004, the FOMC raised the federal funds rate from 1% to 5.25% in 17 increments of 25 basis points each. Meanwhile, housing and credit bubbles were rapidly expanding, fueling excessive household consumption, a sharp drop in personal savings, and a record current-account deficit – imbalances that set the stage for the meltdown that was soon to follow.

A “meltdown” that might be in store for us again (even worse than last time around?) if the Federal Reserve doesn’t veer from the path it’s on, says Roach.

It’s a disturbing read, which is available in its entirety on the Project Syndicate website here.

Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Arends, Brett. “Economic ‘Armageddon’ Predicted.” Boston Herald. 23 Nov. 2004. (http://www.fromthewilderness.com/free/ww3/112304_economic_armageddon.shtml). 23 Dec. 2014.

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Alan Greenspan: Gold Is A Currency, And Currently A Good Investment

Back in late October I recall The Wall Street Journal talking about some comments made by former Federal Reserve Chairman Alan Greenspan to the Council on Foreign Relations concerning gold. I’ve been meaning to look into what Greenspan, who served as Fed Chair from 1987 to 2006, actually said about the precious metal. During lunchtime, I dug up the final version of the transcript from his visit with the CFR in New York City on October 29, 2014. From the exchange between the president of Greenspan Associates LLC and presider Gillian Tett:

TETT: I’m going to turn to the audience for questions in one minute, but before I do though, I just want to ask though, one of the really interesting chapters in your book is about gold. And there’s been a lot of media debate in the past about your views on gold.

You yourself oppose a question as to why would anyone want to buy this barbarous relic — I don’t know whether John Paulson is in the audience — but it’s an interesting question. But do you think that gold is currently a good investment given what you’re saying about the potential for turmoil?

GREENSPAN: Yes.

(LAUGHTER)

TETT: Do you put…

GREENSPAN: Economists are usually perfect in equivocating. In this case I didn’t equivocate. Look, remember what we’re looking at. Gold is a currency. It is still by all evidences the premier currency where no fiat currency, including the dollar, can match it. And so that the issue is, if you’re looking at a question of turmoil, you will find, as we always have in the past, it moves into the gold price.

But the gold price is actually sort of half a commodity price, so when the economy is weakening, it goes down like copper. But it’s also got a monetary characteristic which is instrinsic. It’s not inbred into human beings — I cannot conceive — of any mechanism by which you could say that, but it behaves as though it is.

Intrinsic currencies like gold and silver, for example, are acceptable about a third party guarantee. And, I mean, for example at the end of World War II, or just at the end of it, Germany could not import goods without payment in gold. The person who shipped the goods in would accept the gold, and didn’t care whether there was any credit standing — associated with it. That is a very rare phenomenon. It’s — it’s the reason why, for example, in a renewal of an agreement that the central banks have made — European central banks, I believe — about allocating their gold sales which occurred when gold prices were falling down, that has been renewed this year with a statement that gold serves a very important place in monetary reserves.

And the question is, why do central banks put money into an asset which has no rate of return, but cost of storage and insurance and everything else like that, why are they doing that? If you look at the data with a very few exceptions, all of the developed countries have gold reserves. Why?

TETT: I imagine right now, it’s because of a question mark hanging over the value of fiat currency, the credibility going forward.

GREENSPAN: Well, that’s what I’m getting at. Every time you get some really serious questions, the 50 percent of the gold price determination begins to move.

TETT: Right.

GREENSPAN: And I think it is fascinating and — I don’t know, is Benn Steil in the audience?

TETT: Yes.

GREENSPAN: There he is, OK. Before you read my book, go read Benn’s book. The reason is, you’ll find it fascinating on exactly this issue, because here you have the ultimate test at the Mount Washington Hotel in 1944 of the real intellectual debate between the — those who wanted to an international fiat currency which was embodied in John Maynard Keynes’ construct of a banker, and he was there in 1944, holding forth with all of his prestige, but couldn’t counter the fact that the United States dollar was convertible into gold and that was the major draw. Everyone wanted America’s gold. And I think that Benn really described that in extraordinarily useful terms, as far as I can see. Anyway, thank you.

TETT: Right. Well, I’m sure with comments like that, that will be turning you into a rock star amongst the gold bug community…

(Editor’s note: Bold added for emphasis)

I’m not sure if the above will mean Greenspan is now a rock star among the “gold bugs”- he’s still considered by many as being a habitual asset bubble blower. But such a high-profile individual within the global financial community lending support to the ideas that gold is a currency and currently a good investment will no doubt anger a number of gold bears and haters.

You can read the entire transcript of Greenspan’s visit to the CFR on their website here.

Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s note: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Illinois Named Worst-Run State In America In 2014

“‘We don’t have the time to mess around. We are in deep, deep trouble financially,’ [Illinois Governor-elect Bruce] Rauner told a meeting of the Illinois Farm Bureau at a downtown Chicago hotel. ‘The next 24 months are going to be rough. And I apologize. I ain’t going to be Mr. Popularity for a little while. That’s OK. Four years from now I think, though, everybody will appreciate what we did.’”

Chicago Tribune website, December 8, 2014

Talk about lists you don’t want to be on. In 2012 and 2013, Illinois was the 3rd worst-run state in the annual best- and worst-run states in America survey conducted by New York City-based financial news and opinion organization 24/7 Wall St.

So how did the “Land of Lincoln” fare in 2014? From the 24/7 Wall St. website on December 3:

How well run is your state? Assessing a state’s management quality is hardly easy. The current economic climate and standard of living in any given state are not only the results of policy choices and developments that occurred in the last few years, but can also be affected by decisions made decades ago, and by forces outside a state’s control.

Each year, 24/7 Wall St. attempts to answer this question by surveying various aspects of each state. To determine how well states are managed, we examine key financial ratios, as well as social and economic outcomes. This year, North Dakota is the best-run state in the country for the third consecutive year, while Illinois replaced California as the worst-run state

(Editor’s note: Bold added for emphasis)

Ouch. Worst part is, the people who brought us this mess are the same ones still in charge, more or less. It will be interesting to see how much of a difference Governor-elect Rauner- who ran on the Republican ticket- can make in the Democrat-controlled state.

24/7 Wall St. went into more detail about my home state’s latest “honor.” From the piece:

Illinois is the worst-run state in the nation. Like many other low-ranked states, more people left Illinois than moved there. Illinois lost more than 137,000 residents due to migration between the middle of 2010 and July 2013. A poor housing market may partly explain the exodus. Median home values fell 16.2% between 2009 and 2013, the second largest drop nationwide. Illinois has extremely poor finances by many measures. Just 39.3% of Illinois’ pension liabilities were funded as of 2013, worse than any other state. Further, the state’s reserves are estimated at just 0.5% of its general fund expenditure, the second lowest reserves rate nationwide. Both Moody’s and S&P gave Illinois the worst credit ratings of any state, at A3 and A- respectively. According to Moody’s, the state’s rating reflects its low fund balances and high pension obligations, as well as its “chronic use of payment deferrals to manage operating fund cash.”

As for our neighbors, Indiana is ranked 28th and Wisconsin comes in at 26th in 2014- down from 19th and 21st- respectively.

That’s quite a hit (9 places) the Hoosiers took from last year. Wonder what’s behind the drop?

Curious as to where 24/7 Wall St. ranked your state in 2014? Head on over to their website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Peter Schiff Warns Of Coming Recession, QE 4

It’s been pretty busy around here as I play catch-up on my different Internet projects. But I did get the chance last night to view the latest entry on “crash prophet” Peter Schiff’s The Schiff Report YouTube.com video blog. What is the CEO/Chief Global Strategist of Euro Pacific Capital predicting these days? Another U.S. recession and QE 4. Schiff warned:

When this illusion collapses, this fantasy of a U.S. economic recovery- because everybody believes there’s no recession anywhere in sight, that we’re years away from a U.S. recession- when in fact, another recession is right around the corner. And in fact, it will be worse than the recession that we had in 2008, 2009, if the Fed does not come in with QE 4…

I expect Janet Yellen to react to this coming recession the way Ben Bernanke reacted to the last one. The way Alan Greenspan reacted to the last one. Because that’s the only playbook we’ve got. And remember, when this recession starts, they can’t start with rate cuts. Rates are at zero. You can’t cut from zero. All they can do is revamp QE. And believe me, it’s going to have to be a lot bigger than QE 3. QE 4 is going to have to be bigger than QE 3 for the same reason QE 3 had to be bigger than QE 2- the economy builds up a tolerance. The more addicted to QE, the more QE you need to get any kind of result. And this last result was minimal in the real economy. I mean, yes- the Fed was able to get the stock market to go up, but the real economy never experienced any real economic growth. The average American is worse off today than when QE began. By far. Incomes are down. Real employment is down. Net worth is down. Poverty is up. Government dependency is up. The cost of living is up. Nothing has improved, except maybe the level of optimism on Wall Street…

This crisis is not really going to be about a credit crisis. Not private credit. It’s going to be about debt. Sovereign credit. It’s going to be about the dollar. A currency crisis. A sovereign crisis. Which is going to be very different than the crisis we had in 2008. It’s a crisis of an excess of QE. Of an overdose of QE. That’s the one that’s coming. That’s the one that we have to prepare for. That’s the one that I have been warning about since the beginning…


“The Scary Truth Behind the Halloween Rally”
YouTube Video

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Cook County Residents To Get Hit With Tax Hikes Soon?

For a while now (last time being earlier this week), I told my girlfriend we were lucky to have escaped the fiscal debacle and revenue grab going on in the city of Chicago.

At the same time, I pointed out that as Cook County residents we’re still on the hook for the same type of nonsense.

Brian Slodysko reported on the Chicago Sun-Times website yesterday afternoon:

Hoping to ward off another credit rating downgrade, Cook County Board President Toni Preckwinkle said Wednesday that she will soon present a plan to reform the county’s underfunded pension system.

And she’s leaving the door open to hiking property, sales and other taxes.

When asked repeatedly about the possibility of tax increases, Preckwinkle responded: “We’re looking at all the options. Everything is on the table.”

(Editor’s note: Bold added for emphasis)

Slodysko added later in the piece:

Preckwinkle declined to discuss specifics, but she did say that any plan that goes before the Legislature will not have property tax increase language written into the bill

(Editor’s note: Bold added for emphasis)

Okaaay… so that means Preckwinkle’s not “leaving the door open” to hiking property taxes?

Regardless, based on what I see coming down the line for us, it’s only a matter of time.

Last summer, Cook County saw its bond rating lowered by one of the major credit rating agencies supposedly due to its public pension liabilities. I blogged on August 20, 2013:

In the wake of significantly downgrading the City of Chicago’s credit rating, bond credit rating giant Moody’s Investor Service lowered Cook County’s bond rating a notch last Friday. In a news release from the Moody’s website right before the weekend:

New York, August 16, 2013 — Moody’s Investors Service has downgraded the rating on Cook County’s (IL) general obligation (GO) debt to A1 from Aa3, affecting $3.7 billion of general obligation debt. The outlook remains negative.

SUMMARY RATING RATIONALE

The downgrade of the GO rating reflects Cook County’s growing pension liabilities…

(Editor’s note: Bold added for emphasis)

Stay tuned…

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Slodysko, Brian. “Preckwinkle won’t rule out tax increase to strike pension deal.” Chicago Sun-Times. 9 Apr. 2014. (http://politics.suntimes.com/article/chicago/preckwinkle-wont-rule-out-tax-increase-strike-pension-deal/wed-04092014-523pm). 10 Apr. 2014.

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Moody’s Downgrades Chicago’s Credit Rating Again, Issues Negative Outlook

Just as I was about to blog about prepping tonight I observed the following splashed on the homepage of the Chicago Tribune website:

Chicago credit rating takes major hit

Chicago’s financial standing took a hit Tuesday when a major bond rating agency once again downgraded the city’s credit worthiness…

No surprise there, all things considered. No real effort has been made to tackle Chicago’s financial woes, which led to bond credit rating giant Moody’s Investor Service downgrading the City of Chicago’s general obligation (GO) and sales tax ratings to A3 from Aa3, water and sewer senior lien revenue ratings to A1 from Aa2, and water and sewer second lien revenue ratings to A2 from Aa3 back on July 17, 2013.

After seeing that headline, I decided to head over to Moody’s Investors Service website to check out the latest “Ratings News,” where the following was posted:

Rating Action: Moody’s downgrades Chicago, IL to Baa1 from A3, affecting $8.3 billion of GO and sales tax debt…

Also downgrades water and sewer senior lien revenue bonds to A2 from A1 and second lien revenue bonds to A3 from A2, affecting $3.3 billion of debt; outlook negative for all ratings…

According to Moody’s, “Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.”

Their Global Credit Research unit added:

The Baa1 rating on Chicago’s GO debt reflects the city’s massive and growing unfunded pension liabilities, which threaten the city’s fiscal solvency absent major revenue and other budgetary adjustments adopted in the near term and sustained for years to come. The size of Chicago’s unfunded pension liabilities makes it an extreme outlier, as indicated by the city’s fiscal 2012 adjusted net pension liability (ANPL) of 8.0 times operating revenue, which is the highest of any rated US local government. While the Illinois General Assembly’s recent passage of pension reforms for the State of Illinois (A3 negative) and the Chicago Park District (CPD) (A1 negative) suggests that reforms may soon be forthcoming for Chicago, we expect that any cost savings of such reforms will not alleviate the need for substantial new revenue and fiscal adjustments in order to meet the city’s long-deferred pension funding needs. We expect that the city’s pension contributions will continue to fall below those based on actuarial standards. The city’s slowly-amortizing debt levels are also large and growing. The Baa1 rating also incorporates credit strengths including Chicago’s large tax base that sits at the center of one of the nation’s most diverse regional economies and the city’s broad legal authority to raise revenue…

You can read the entire Moody’s piece about the downgrade on their website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Chicago, The Writing Is On The Wall

The city of Chicago is in for some tough times down the road.

“The Machine” keeps putting a positive spin on the city’s deteriorating financial condition, but the numbers don’t lie. I’ve rattled them off time and time again, the most recent being Tuesday. The Chicago press (sans Fran Spielman over at the Chicago Sun-Times and a few others) has even caught on, publishing articles with more frequency these days that reveal just how ugly the city’s finances truly are. Case in point, a Chicago Tribune editorial entitled “Chicago is on the road to Detroit” that appeared on their website yesterday. From the piece:

By the most recent numbers, Mayor Rahm Emanuel’s government owes $13.9 billion in general obligation bond debt, plus $19.5 billion in unfunded pension obligations. Add in Chicago Public Schools and City Hall’s other “sister agencies” and you’re talking billions more in debts that Chicago taxpayers owe. Yet here we are on a Wednesday when the mayor probably will get approval from a derelict City Council to issue another up-to-$900 million in bonds backed by property taxes — and to double, to $1 billion, the amount of short-term bank money his administration can borrow to raise cash…

(Editor’s note: Italics added for emphasis)

By the way, Mayor Emanuel got that approval. Fran Spielman reported on the Chicago Sun-Times website Wednesday morning:

Without a word of debate, the City Council on Wednesday blindly added $1.9 billion to Chicago’s mountain of debt even though aldermen have no idea how the money will be spent.

The vote was 43-to-4. “No” votes were cast by Aldermen Bob Fioretti (2nd), Scott Waguespack (32nd), Brendan Reilly (42nd) and John Arena (45th)…

Now, I’ve heard/read some Chicagoans say something along the lines of don’t worry about the city’s finances, Governor Quinn and the State of Illinois or President Barack Obama and the federal government will ride to the rescue of their fellow Democrats in control of the “Windy City.”

To which I say, I’m not so sure. Is there anyone in America who doesn’t know how much of an economic basket case the “Land of Lincoln” is? A $100.5 billion public pension debt and the worst credit rating of all 50 U.S. states routinely make headlines across the country. As for the federal government, I keep encountering the words “insolvent” and “bankrupt” more and more these days to describe the nation’s finances. And don’t think for a second other economically-challenged cities across the country won’t cry foul to the Oval Office and their elected representatives if Chicago is bailed out. I find it hard to believe the State of Illinois or the Feds could come to Chicago’s rescue without there being serious financial and political repercussions.

Chicago, the writing is on the wall. By the looks of things, that great city where I was born and from which I recently just left is now past the proverbial point of no return, no longer looking capable of effectively navigating the growing financial crisis.

While I don’t foresee the city’s death, I do envision a continuation of its already gradual decline until a point of fiscal implosion is reached. Will it be Detroit-esque in its bottoming out? I don’t know. But it sure as hell won’t be pretty.

Faced with such a scenario, will Chicagoans choose to stay and contend with the almost certain prospect of much higher taxes and fees in conjunction with curtailed city services (public safety comes to mind here), or will they depart the “Second City” like I did?

One might think the latter (going), but I’m sure there will be plenty of the former (staying).

In the interests of surviving and prospering, which is the better choice?

I don’t think the answer is as clear-cut as many readers might think. And it’s something I’ll be exploring and blogging about more in the coming days.

By Christopher E. Hill
Survival And Prosperity (survivalandprosperity.com)

Sources:

“Chicago is on the road to Detroit.” Chicago Tribune. 5 Feb. 2014. (http://www.chicagotribune.com/news/opinion/editorials/ct-chicago-debt-edit-0205-20140205,0,3757189.story). 6 Feb. 2014.

Spielman, Fran. “City Council OKs going $1.9 billion deeper into debt.” Chicago Sun-Times. 5 Feb. 2014. (http://www.suntimes.com/25398572-761/city-council-oks-going-19-billion-deeper-into-debt.html). 6 Feb. 2014.

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Growing Illinois Fiscal Fiasco Makes Wisconsin Relocation More Attractive

Regular readers of Survival And Prosperity may recall me blogging from time to time that as things stand, Wisconsin- not Illinois- looks to be my primary state of residence down the road. For example, I wrote back on January 29 of last year:

By the time I started this blog back in November 2010, I already had a pretty good idea I’d eventually be leaving the city of Chicago to reside someplace else. And every once in a while, I’d query the “best places” to live in America- should TSHTF or not. While the area of southeastern Wisconsin I’m looking at moving to in a few years is probably not “ideal” (even less so the suburbs of Chicago) from a prepper’s perspective, practitioners of modern survivalism would probably see more positives than negatives with the location. Keeping in mind that not only do I envision a certain lifestyle for myself down the road, but I also think I have a pretty good idea of what will be required to “survive and prosper” in America in the coming years, this part of the Midwest really appears to be a nice fit not only for me but my girlfriend as well. Here’s hoping it is…

Sure, certain Wisconsin taxes tend to be higher than in the “Land of Lincoln.” But at least it’s not a fiscal basket case, where I can envision Illinois one day leapfrogging our neighbors to the north when it comes to levels of revenue collection.

Chicago Tribune columnist Dennis Byrne reminded the paper’s readers just how precarious our financial situation has gotten here in Illinois… in addition to suggesting a state we might want to consider emulating. He wrote on the Tribune website on January 28:

Illinois is a stinking mess.

A steaming heap of suffocating debt, endless greed, blind self-interest and numbing incompetence. How we’ve been able to survive this long without plunging into the abyss is beyond me, and all reason.

No need here to document all of the state’s failures. Way behind on its bills. The nation’s worst credit rating. Higher unemployment than the nation. Business wanting to scram, fed up with an unfriendly entrepreneurial climate. Crushing pension obligations so far into the future that no one alive today, even if they ponied up every cent they made (after taxes, of course), will ever see the end of it.

Illinois is run by a self-renewing, power-hungry, piggish oligarchy so impervious to change (I hesitate to use the word reform, because true reform is as rare in Illinois as is the sight of Pike’s Peak) that it makes feudalism look good.

Don’t try to argue that a recent package of minor changes to the public employees’ pension system, grudgingly enacted by the serfs in the state legislature, is reform. Even if it were, it’s going nowhere because it will be dead on arrival in Illinois’ courts. That’s because the hoggish public employee unions were able, at the last minute, to ram into the state constitution a provision that guarantees their cupidity will be fed, well, forever.

What makes it all so vexing is how close the answer to our problems is: Wisconsin.

While Illinois is circling the drain, Wisconsin has saved itself from a similar fate and, in the aftermath of the longest-lasting recession since Amelia Earhart became the first woman to fly solo across the Atlantic Ocean, is actually doing OK, if not prospering…

“Prospering.”

It’s been a long time since I’ve heard/seen that word associated with Illinois.

Which is too bad, because I really do love this state and my fellow Illinoisans.

But seeing as my goal remains not only to survive but prosper as the times become more tumultuous, Byrne’s observation further convinces me my future still lies up north.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Byrne, Dennis. “Illinois Should Look To Wisconsin.” Chicago Tribune. 28 Jan. 2014. (http://www.chicagotribune.com/site/ct-oped-byrne-0128-20140128,0,5528813.column). 3 Feb. 2014.

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